Trash stocks have been awesome games during and after COVID. The VanEck Vectors Environmental Services ETF (EVX) has posted a total return of around 45% over the past two years, outperforming the S&P 500 ETF (TO SPY) by almost 18 percentage points. One of his largest holdings has long-term tailwinds, but I see mixed fundamentals and technicals.
Although there is no treasure, the trash stocks are holding up well
According to BofA Global Research, Republic Services (New York stock market :RSG) is the second-largest non-hazardous waste operator, serving commercial, industrial, municipal and residential customers in 41 states and Puerto Rico. The company is vertically integrated and has 340 collection operations, 198 transfer stations, 189 active solid waste landfills and 60 recycling centers. Republic achieves significant economies of scale, with 68% of the waste it collects being disposed of in its own landfill.
The $42.1 billion Arizona-based business services and supplies company in the industrials sector trades at a high GAAP price-to-earnings ratio of 29.1 out of 12 month and pays a small dividend yield of 1.5%, according to The Wall Street Journal.
The company is well positioned for the long-term topic of environmentally friendly waste trends. Changes in recycling methods, renewable energy generated from landfill gas and pricing of waste areas should all help RSG generate profits in the future. Additionally, the industry could see new consolidation trends, so there is potential for mergers and acquisitions. Although free cash flow is positive thanks to expanding margins, there are downside risks – lower inflation would hurt business. Adverse regulatory issues regarding environmental policies are also a potential risk.
As for earnings, BofA analysts believe that earnings have risen sharply in 2022, a rare site in this economy. EPS growth appears to remain robust through 2024, and Bloomberg consensus forecasts agree. In addition, dividends are expected to increase steadily over the next few years. However, RSG’s operating P/E and GAAP are quite high, and its EV/EBITDA multiple is expensive.
With robust growth and a high earnings multiple, I like to see what the PEG ratio shows. Currently, it is 2.3 using the forecast numbers, below its long-term average. Shareholders should benefit from strong free cash flow from the company – potentially fueling buyouts or an acquisition. Overall, while Seeking Alpha rates Republic’s Evaluation with a bad “D-”, I think the valuation is reasonable given the growth outlook, but it’s definitely not a value stock.
Services of the Republic: profits, valuation, dividend forecasts
Looking ahead, corporate events data provided by Wall Street Horizon points to an unconfirmed Q4 2022 earnings date of Thursday, February 9 AMC. Before that, however, the company’s leadership team is due to speak at Baird 52n/a Annual World Industry Conference 2022 from November 8 to 10 in Chicago. Often during these events, major industry trends are described, which can lead to volatility in stock prices.
Corporate Events Calendar
The technical grip
RSG has held up well as the market has trended south over the past 12 months. Notice in the chart below that an ascending triangle is taking shape. The presumption is that this consolidation pattern will resolve into the higher degree trend – higher. Unfortunately, the stock attempted to rally above the key $140 level, but this appears to be a false bearish breakout. Stocks quickly retreated to support. But the stock is now making another run for a breakout. I’d like to see the stock close above $150 to help confirm a resumption of the uptrend.
Also take note of the 200-day long-term moving average, which is now stable after sloping upwards. This is a sign that the uptrend has run out of steam. Overall, the technical picture, like the valuation, is mixed.
RSG: a failed escape attempt. Patience required.
I’m waiting for RSG. It’s a solid growth name, but the valuation has priced in significant EPS growth over the next few years. Techs, meanwhile, also show a bit of exhaustion after a stellar run from March 2020 to a year ago. Despite relative strength this year, give this stock more time to generate steam for another leg higher.